Republic Bancorp, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company is a Kentucky-based bank holding company with Traditional Banking, Mortgage Banking and Republic Processing Group (RPG) businesses. Figures below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2013 / June 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $6.1; diluted Class A EPS $0.30 | Q2 2012: $9.6; $0.46 per share |
| Six-month net income | $19.5; diluted Class A EPS $0.94 | First half 2012: $92.1; $4.38 per share |
| Net interest income | Q2: $28.8; first half: $57.9 | Q2 2012: $28.3; first half 2012: $101.5 |
| Net interest margin | Q2: 3.56%; first half: 3.56% | Q2 2012: 3.53%; first half 2012: 5.73% |
| Total assets | $3,317 | $3,394 at Dec. 31, 2012 |
| Loans, net of allowance | $2,596; allowance $22.5 | $2,626; allowance $23.7 at Dec. 31, 2012 |
| Deposits | $1,971 | $1,983 at Dec. 31, 2012 |
| Cash and cash equivalents | $97.7 | $137.7 at Dec. 31, 2012 |
| Stockholders’ equity | $544.1 | $536.7 at Dec. 31, 2012 |
For the first half, operating cash flow was $3.5 versus $128.4 in 2012; investing activities provided $52.1 and financing activities used $95.6. The prior-year cash flows included substantial FDIC-assisted acquisition proceeds. At June 30, FHLB advances were $592.0, short-term borrowings were $128.5 and subordinated notes were $41.2. The loan-to-deposit ratio, excluding brokered deposits, was 141%. The company reported $316 million of additional FHLB borrowing capacity and $196 million of unsecured credit lines. It and its banks exceeded regulatory capital requirements; the parent’s Tier 1 leverage ratio was 17.01% and RB&T’s was 12.89%.
Changes versus comparable periods
- Q2 net income fell 36% year over year; first-half net income fell 79%. First-half 2012 included a $27.8 million bargain purchase gain from the Tennessee Commerce Bank acquisition.
- The larger year-over-year decline also reflects the discontinued Refund Anticipation Loan (RAL) product. First-half 2012 RAL revenue included $45.2 million of interest income; RALs ended April 30, 2012. Net refund-transfer fees fell 82% to $13.7 million in the first half, following the loss of Liberty Tax Service and Jackson Hewitt contracts, which together represented about 53% of 2012 refund-transfer volume.
- Q2 net interest income rose 2% and net interest margin increased three basis points. First-half net interest income declined 43%, principally because RAL income was absent; first-half margin fell from 5.73% to 3.56%.
- Mortgage banking income increased 64% in the first half to $5.5 million, alongside higher loan originations. Rising long-term rates late in Q2 were already reducing applications.
- Total nonperforming loans rose to $24.1 million from $21.7 million at year-end, and the ratio increased to 0.92% from 0.82%. Nonperforming assets fell to $39.3 million from $47.9 million, mainly as other real estate owned declined to $15.2 million from $26.2 million. Delinquent loans fell to $16.2 million from $20.8 million.
Outlook, risks and notable items
- H&R Block transaction: A July 11, 2013 agreement would transfer approximately $470 million of H&R Block Bank deposits and about $3 million of noncash assets to RB&T, with an estimated $467 million cash payment to RB&T. Closing depended on regulatory approvals and completion of a new marketing services agreement and receivables purchase agreement. Management estimated the combined arrangements could add $0.57–$0.75 annually to diluted EPS if completed; this is an estimate, not a guarantee. Approval timing, contract negotiations, product demand, credit losses, deposit retention and capital effects are risks. The cash inflow could improve liquidity while reducing the Tier 1 leverage ratio; management expected capital to remain above “well-capitalized” levels.
- Bank merger application: The company sought regulatory approval to merge RB&T and Republic Bank under a national charter, with the OCC as primary regulator. Management noted that regulatory interpretations could differ and affect estimates, including loan-loss reserves.
- Interest-rate and business outlook: Management expected loan and investment repricing to continue pressuring core net interest income and margin. Higher long-term rates were expected to weigh on mortgage applications and warehouse lending activity. The filing provides no broad earnings guidance. Management projected $784,000 of acquisition-loan discount accretion for the remainder of 2013.
- Tax-processing and legal exposure: RPG faced competitive pricing pressure, additional oversight requirements and ongoing Liberty and Jackson Hewitt disputes. The JHI arbitration hearing occurred July 26, 2013, with a decision anticipated in Q3; Liberty was in mediation. Elevated legal expenses were expected to continue in 2013. A separate putative class action concerning overdraft fees remained pending; the bank had moved to dismiss the amended complaint.
- Credit and valuation risks: Management said the allowance was adequate, but nonperforming loans and impaired loans increased, and the bank recorded $766,000 of first-half provisions for purchased credit-impaired loans. A $5.6 million illiquid private-label mortgage-backed security was valued using Level 3 assumptions; changes in default, prepayment or loss-severity assumptions could materially affect its valuation.
Key facts for investors to verify
- Whether the H&R Block transaction received approvals and whether the MSA and RPA were executed on terms supporting the projected EPS contribution.
- Subsequent RPG refund-transfer volumes, pricing and legal outcomes involving Liberty and Jackson Hewitt.
- Credit trends, including nonperforming loans, impaired loans, troubled debt restructurings and the adequacy of the allowance.
- Whether rising rates further reduce mortgage originations and warehouse balances, and how funding costs affect net interest margin.
- Liquidity and capital effects of deposit concentration, additional FHLB borrowing and any H&R Block-related asset growth.